Fixed-rate mortgages offer stability in your mortgage payments. However, many ARMs start with a lower interest rate than fixed mortgages and lock the rate in for a few years. That can mean significantly lower payments in the early years of your loan, so some borrowers opt for an ARM with the intention of selling or refinancing their home before the rate can adjust.

__If you are thinking about buying a home in the near future, it’s a good idea to check your credit report and find out what your credit score is early on. You are entitled to a free credit report once a year from each of the three credit bureaus – Equifax, TransUnion, and Experian, which you can access at www.annualcreditreport.com. Check for mistakes on your credit report. A mistake on your credit report can cost you when trying to secure a home loan. Mistakes do happen, so review your credit report closely to ensure everything is correct and dispute any errors you might find with the appropriate credit bureau.__

`In addition to saving for a down payment, you’ll need to budget for the money required to close your mortgage, which can be significant. Closing costs generally run between 2% and 5% of your loan amount. You can shop around and compare prices for certain closing expenses, such as homeowners insurance, home inspections and title searches. You can also defray costs by asking the seller to pay for a portion of your closing costs or negotiating your real estate agent's commission. Calculate your expected closing costs to help you set your budget.`

__In some cases, you may not be required to provide all of that information. Some loans are referred to as low doc or no doc because they don't require you to prove any of the statements that you make to your underwriter. These loans are normally more expensive, but can be easier to obtain. Additionally, you can obtain a preauthorization before you submit an offer on a home you would like to buy. That can speed up the process, and also shows the seller that you are serious about the purchase.__

**You borrow money from a mortgage lender to buy a house. You close on the loan and sign a bunch of paperwork. The deed is transferred to you, giving you ownership of the property. You now have a financial agreement with the lender. You’ve agreed to repay your 30-year fixed-rate mortgage loan with regular payments each month. You’ve also agreed to pay interest, which will be included within your monthly payments.**

^{Treasury/FHA Second Lien Program (FHA2LP): If you have a second mortgage and the mortgage servicer of your first mortgage agrees to participate in FHA Short Refinance, you may qualify to have your second mortgage on the same home reduced or eliminated through FHA2LP. If the servicer of your second mortgage agrees to participate, the total amount of your mortgage debt after the refinance cannot exceed 115% of your home’s current value. }

^{A commission-based mortgage lender will primarily be motivated by closing your mortgage, whether or not the terms of the mortgage are in your best interest. With salary-based mortgage consultants, you won’t have to worry that your mortgage lender is locking you into a huge financial commitment in order to make their own mortgage payment for the month. Interest rates change daily and vary based on your financial situation. So, you want to be sure your loan officer or consultant takes the time to get you to know your current finances, as well as your outlook and goals. }

What I want to do with this video is explain what a mortgage is but I think most of us have a least a general sense of it. But even better than that actually go into the numbers and understand a little bit of what you are actually doing when you’re paying a mortgage, what it’s made up of and how much of it is interest versus how much of it is actually paying down the loan. So, let’s just start with a little example. Let’s say that there is a house that I like, let’s say that that is the house that I would like to purchase. It has a price tag of, let’s say that I need to pay $500,000 to buy that house, this is the seller of the house right here. And they have a mustache, that’s the seller of the house. I would like to buy it. I would like to buy the house. This is me right here. And I’ve been able to save up $125,000. I’ve been able to save up $125,000 but I would really like to live in that house so I go to a bank, I go to a bank, get a new color for the bank, so that is the bank right there. And I say, Mr. Bank, can you lend me the rest of the amount I need for that house, which is essentially $375,000. I’m putting 25 percent down, this right, this right, this number right here, that is 25 percent of $500,000. So, I ask the bank, can I have a loan for the balance? Can I have a $375,000 loan? And the bank says, sure, you seem like, uh, uh, a nice guy with a good job who has a good credit rating. I will give you the loan but while you’re paying off the loan you can’t have the title of that house. We have to have that title of the house and once you pay off the loan we’re going to give you the title of the house. So what’s going to happen here is we’re going to have the loan is going to go to me, so it’s $375,000, $375,000 loan. Then I can go and buy the house, so I’m going to give the total of $500,000, $500,000 to the seller of the house and I’ll actually move into the house myself, assuming I’m using it for my own residence. But the title of the house, the document that says who actually owns the house, so this is the home title, this is the title of the house, home, home title. It will not go to me. It will go to the bank, the home title will go from the seller, maybe even the seller’s bank, maybe they haven’t paid off their mortgage, it will go to the bank that I’m borrowing from. And this transferring of the title to secure a loan, I say secure a loan, I’m saying, look, I need to give something to the lender in case I don’t pay back the loan or if I just disappear. So, this is the security right here. That is technically what a mortgage is. This pledging of the title for, as the, as the security for the loan, that’s what a mortgage is. And actually it comes from old French, mort, means dead, dead, and the gage, means pledge, I’m, I’m a hundred percent sure I’m mispronouncing it, but it comes from dead pledge. Because, I’m pledging it now but that pledge will eventually die once I pay off the loan. Once I pay off the loan this pledge of the title to the bank will die, it’ll come back to me. And that’s why it’s called a dead pledge or a mortgage. And probably because it comes from old French is the reason why we don’t say mort gage. We say, mortgage. But anyway, this is a little bit technical but normally when people refer to a mortgage they’re really referring to the loan itself. They’re really referring to the mortgage, mortgage, the mortgage loan. And what I want to do in the rest of this video is use a little screenshot from a spreadsheet I made to actually show you the math or actually show you what your mortgage payment is going to. And you can download, you can download this spreadsheet at Khan Academy, khanacademy.org/downloads, downloads, slash mortgage calculator, mortgage, or actually, even better, just go to the download, just go to the downloads, downloads, uh, folder on your web browser, you’ll see a bunch of files and it’ll be the file called mortgage calculator, mortgage calculator, calculator dot XLSX. So, it’s a Microsoft 2007 format. But just go to this URL and then you’ll see all of the files there and then you can just download this file if you want to play with it. But what it does here is in this kind of dark brown color, these are the assumptions that you could input and that you can change these cells in your spreadsheet without breaking the whole spreadsheet. So, here I would assume the 5.5 percent interest rate. I’m buying a $500,000 home. It’s a 25 percent down payment, so that’s the $125,000 that I had saved up, that I’d talked about right over there. And then the, uh, loan amount, well, I have the $125,000, I’m going to have to borrow $375,000. It calculates it for us and then I’m going to get a pretty plain vanilla loan. This is going to be a 30-year, so when I say term in years, this is how long the loan is for. So, 30 years, it’s going to be a 30-year fixed rate mortgage, fixed rate, fixed rate, which means the interest rate won’t change. We’ll talk about that in a little bit. This 5.5 percent that I am paying on my, on the money that I borrowed will not change over the course of the 30 years. We will see that the amount I borrowed changes as I pay down some of the loan. Now, this little tax rate that I have here, this is to actually figure out, what is the tax savings of the interest deduction on my loan? And we’ll talk about that in a second, we can ignore it for now. And then these other things that aren’t in brown, you shouldn’t mess with these if you actually do open up this spreadsheet yourself. These are automatically calculated and this right here is a monthly interest rate. So, it’s literally the annual interest rate, 5.5 percent, divided by 12 and most mortgage loans are compounded on an monthly basis. So, at the end of every month they see how much money you owe and then they will charge you this much interest on that for the month. Now, given all of these assumptions, there’s a little bit of behind the scenes math and in a future video I might actually show you how to calculate what the actual mortgage payment is. It’s actually a pretty interesting problem. But for a $500,000 loan, well, a $500,000 house, a $375,000 loan over 30 years at a 5.5 percent interest rate. My mortgage payment is going to be roughly $2,100. Now, right when I bought the house I want to introduce a little bit of vocabulary and we’ve talked about this in some of the other videos. There’s an asset in question right here, it’s called a house. And we’re assuming that it’s worth $500,000. We are assuming that it’s worth $500,000. That is an asset. It’s an asset because it gives you future benefit, the future benefit of being able to live in it. Now, there’s a liability against that asset, that’s the mortgage loan, that’s the $375,000 liability, $375,000 loan or debt. So, if you are, if this was your balance sheet. If this was all of your assets and this is all of your debt and if you were essentially to sell the assets and pay off the debt. If you sell the house you’d get the title, you can get the money and then you pay it back to the bank. Then, well actually, it doesn’t necessarily go into that order but I won’t get too technical. But if you were to unwind this transaction immediately after doing it then you would have, you would have a $500,000 house, you’d pay off your $375,000 in debt and you would get in your pocket $125,000, which is exactly what your original down payment was but this is your equity. And the reason why I’m pointing it out now is I’m, in this video I’m not going to assume anything about the house price, whether it goes up or down, we’re assuming it’s constant. But you could not assume it’s constant and play with the spreadsheet a little bit. But I, what I would, I’m introducing this because as we pay down the debt this number is going to get smaller. So, this number is getting smaller, let’s say at some point this is only $300,000, then my equity is going to get bigger. So, you can kind of view equity as how much value do you have after you pay off the debt for your house? If you were to sell the house, pay off the debt, what do you have left over for yourself? So, this is really kind of your, this is the real wealth in the house, the owner is, this is what you own, wealth in house or the actual what the owner has. Now, what I’ve done here is, well, actually before I get to the chart, let me actually show you how I calculate the chart and I do this over the course of 30 years and it goes by month. So, so you can imagine that there’s actually 360 rows here on the actual spreadsheet and you’ll see that if you go and open it up. But I just want to show you what I did. So, on month zero, which I don’t show here, you borrowed $375,000. Now, over the course of that month they’re going to charge you 0.46 percent interest, remember that was 5.5 percent divided by 12. 0.46 percent interest on $375,000 is $1,718.75. So, I haven’t made any mortgage payments yet. So, I’ve borrowed $375,000, this much interest essentially got billed up on top of that, it got accrued. So, now before I pay any of my payments, instead of owing $375,000 at the end of the first month I owe $376,718. Now, I’m a good guy, I’m not going to default on my mortgage so I make that first mortgage payment that we calculated, that we calculated right over here. So, after I make that payment then I’m essentially, what’s my loan balance after making that payment? Well, this was before making the payment so you subtract the payment from it, this is my loan balance after the payment. Now, this right here, what I, little asterisk here, this is my equity now. So, remember, I started with $125,000 of equity. After paying one loan balance, after, after my first payment I now have $125,410 in equity. So, my equity has gone up by exactly $410. Now, you’re probably saying, hey, gee, I made a $2,000 payment, a roughly a $2,000 payment and my equity only went up by $410,000. Shouldn’t this debt have gone down by $2,000 and my equity have gone up by $2,000? And the answer is no, because you had to pay off all of this interest, all of this interest. So, that very, in the beginning, your payment, your $2,000 payment is mostly interest. Only $410 of it is principal. But as you, and then you, and then, so as your loan balance goes down you’re going to pay less interest here and so each of your payments are going to be more weighted towards principal and less weighted towards interest. And then to figure out the next line, this interest accrued right here, I took my, your old, your loan balance exiting the last month multiply that times 0.46 percent and you get this new interest accrued. This is your new prepayment balance. I pay my mortgage again. This is my new loan balance. And notice, already by month two, $2.00 more went to principal and $2.00 less went to interest. And over the course of 360 months you’re going to see that it’s an actual, sizable difference. And that’s what this chart shows us right here. This is the interest and principal portions of our mortgage payment. So, this entire height right here, this is, let me scroll down a little bit, this is by month. So, this entire height, if you notice, this is the exact, this is exactly our mortgage payment, this $2,129. Now, on that very first month you saw that of my $2,100 only $400 of it, this is the $400, only $400 of it went to actually pay down the principal, the actual loan amount. The rest of it went to pay down interest, the interest for that month. Most of it went for the interest of the month. But as I start paying down the loan, as the loan balance gets smaller and smaller, each of my payments, there’s less interest to pay, let me do a better color than that. There is less interest, let’s say if we go out here, this is month 198, over there, that last month there was less interest so more of my $2,100 actually goes to pay off the loan. Until we get all the way to month 360 and you can show, see this in the actual spreadsheet, at month 360 my final payment is all going to pay off the principal, very little if anything of that is interest. Now, the last thing I want to talk about in this video without making it too long is this idea of a interest tax deduction. So, a lot of times you’ll hear financial planners or realtors tell you, hey, the benefit of buying your house is that it, it’s, it has tax advantages, and it does. Your interest is tax-deductible. Your interest, not your whole payment. Your interest is tax deductible, deductible. And I want to be very clear with what deductible means. So, let’s for instance, talk about the interest fees. So, this whole time over 30 years I am paying $2,100 a month or $2,129.29 a month. Now, at the beginning a lot of that is interest. So, on month one, $1,700 of that was interest. That $1,700 is tax-deductible. Now, as we go further and further each month I get a smaller and smaller tax-deductible portion of my actual mortgage payment. Out here the tax deduction is actually very small. As I’m getting ready to pay off my entire mortgage and get the title of my house. Now, I want to be very clear on this notion of what tax-deductible even means ‘cause I think it is misunderstood very often. This doesn’t mean, let’s say that, let’s say in one year, let’s say in one year I paid, I don’t know, I’m going to make up a number, I didn’t calculate it on the spreadsheet. Let’s say in year one, year one, I pay, I pay $10,000 in interest, $10,000 in interest. Remember, my actual payments will be higher than that because some of my payments went to actually paying down the loan. And, but let’s say $10,000 went to interest. To say this deductible, and let’s say before this, let’s say before this I was making $100,000. Let’s put the loan aside, let’s say I was making $100,000 a year and let’s say I was paying roughly 35 percent on that $100,000. I won’t go into the whole, uh, tax structure and the, and the different brackets and all of that. Let’s say, you know, if I didn’t have this mortgage I would pay 35 percent taxes which would be about $35,000 in taxes for that year. Just, this is just a rough estimate. Now, when you say that $10,000 is tax-deductible, the interest is tax-deductible, that does not mean that I can just take it from the $35,000 that I would have normally owed and only paid $25,000. What it means is, I can deduct this amount from my income. So, when I tell the IRS how much did I make this year, instead of saying, I made $100,000 I say that I made $90,000 because I was able to deduct this, not directly from my taxes, I was able to deduct it from my income. So, now if I only made $90,000 and I, and this is I’m doing a gross oversimplification of how taxes actually get calculated. And I paid 35 percent of that, let’s get the calculator out. Let’s get the calculator. So, 90 times .35 is equal to $31,500. So, this will be equal to $31,500, put a comma here, $31,500. So, off of a $10,000 deduction, $10,000 of deductible interest, I essentially saved $3,500. I did not save $10,000. So, another way to think about it if I paid $10,000 interest, I’m going to, and my tax rate is 35 percent, I’m going to save 35 percent of this in actual taxes. This is what people mean when they say deductible. You’re deducting it from the income that you report to the IRS. If there’s something that you could actually take straight from your taxes, that’s called a tax credit. So, if you were, uh, if there was some special thing that you could actually deduct it straight from your credit, from your taxes, that’s a tax credit, tax credit. But a deduction just takes it from your income. And so, in this spreadsheet I just want to show you that I actually calculated in that month how much of a tax deduction do you get. So, for example, just off of the first month you paid $1,700 in interest of your $2,100 mortgage payment. So, 35 percent of that, and I got the 35 percent as one of your assumptions, 35 percent of $1,700. I will save $600 in taxes on that month. So, roughly over the course of the first year I’m going to save about $7,000 in taxes, so that’s nothing, nothing to sneeze at. Anyway, hopefully you found this helpful and I encourage you to go to that spreadsheet and, uh, play with the assumptions, only the assumptions in this brown color unless you really know what you’re doing with the spreadsheet. And you can see how the, this actually changes based on different interest rates, different loan amounts, different down payments, different terms, different tax rates, that’ll actually change the, the tax savings and you can play around with the different types of fixed mortgages on this spreadsheet.

*So one thing that makes a mortgage different from other types of loans is that it is backed up by something – in this case, your home. They call this a “collateralized loan.” Credit cards are also loans, but they aren’t backed up by anything. If you fail to make your credit card payments, the credit card companies can’t take your home away from you.*

__Because the interest rate is not locked in, the monthly payment for this type of loan will change over the life of the loan. Most ARMs have a limit or cap on how much the interest rate may fluctuate, as well as how often it can be changed. When the rate goes up or down, the lender recalculates your monthly payment so that you’ll make equal payments until the next rate adjustment occurs.__

Note that the Hope for Homeowners program indicated above has been expanded. Families can now receive aid on a second mortgage, and more lenders are participating and cooperating with the FHA. Banks and lenders have been provided further incentive to participate in the program. Find how the FHA Expanded Hope for Homeowners to assist more borrowers.

#### Apartment renting is great when you are a twenty-something college student and all of the best trendy restaurants are within walking distance of your home. It doesn’t take long, however, until those things slowly fade away and the desire to own a home becomes more than a thought. This is usually the point where you realize you need to evaluate your finances if you are going to apply for a home loan. Fast forward to the point where you have made the decision to buy a home and you are getting an approval. The bank comes back to you saying that you did not get approved for the loan. It can be devastating but if you know the reasons why you can’t qualify for a loan, the easier it will be to work on fixing them so that your dream of owning a home can become a reality.

It’s a loan with your house and land used as collateral. If you don’t pay back the loan, the lender will foreclose. That doesn’t mean the bank owns the house until you pay it off. It means they’ve got a lien against the property. A lien is the right to take possession of someone else’s property, in this case your home, until a debt is paid off. So you really are a homeowner even if you have a mortgage. You just own a home with a lien. Zillow’s Mortgage Learning Center offers extensive information about mortgages and is a great resource for anyone in the market for a home loan.

###### Short sale can be an alternative to a foreclosure, and it will allow you to sell your home for less than the current outstanding mortgage balance on it. While this can be a drawn out process and take time, this option is becoming more common and acceptable by banks, real estate agents and servicers. Learn more on how short sales can stop foreclosures.

*The US Treasury administers the Hardest Hit Fund, which provides aid to the states that were most impacted by the economic crisis. Each of these states have local agencies that help homeowners in various ways, including mortgage payment assistance for the unemployed, principal reduction, and transactional assistance. This helps people either afford the homes they’re in, or move to more affordable housing.*

*The amount you put down also affects your monthly mortgage payment and interest rate. If you want the smallest mortgage payment possible, opt for a 30-year fixed mortgage. But if you can afford larger monthly payments, you can get a lower interest rate with a 20-year or 15-year fixed loan. Use our calculator to determine whether a 15-year or 30-year fixed mortgage is a better fit for you. Or you may prefer an adjustable-rate mortgage, which is riskier but guarantees a low interest rate for the first few years of your mortgage.*

_{The first thing lenders will probably do when you apply for a mortgage loan is to check your credit; you should, too. There’s no better time for regular credit monitoring than when you’re trying to prove your creditworthiness to a lender so you can get the best possible rates. You want to make sure that your credit report is as accurate as possible, your scores are where you want them to be, and no one else is getting access to your credit, possibly harming your scores. }

`Many real estate agents want you to be pre-qualified for a loan before they will start to work with you. The mortgage pre-qualification process is fairly simple, usually just requiring some financial information such as your income and the amount of savings and investments you have. Once you are pre-qualified, you will have a better sense of how much you can borrow and the price range of the homes you can afford.`

^{As interest rates rise, so does your monthly payment, with each payment applied to interest and principal in the same manner as a fixed-rate mortgage, over a set number of years. Lenders often offer lower interest rates for the first few years of an ARM, but then rates change frequently after that – as often as once a year. The initial interest rate on an ARM is significantly lower than a fixed-rate mortgage. }

`Your first action item is to seek pre-approval from a lender. It's important to note that pre-approval and pre-qualification are two different processes. For pre-approval, the lender will check your credit and other financial information to determine what price home you can afford. (You can use an online mortgage calculator to give you a ballpark figure on how much home you can afford.) This will give you a price range to stay within during your home search and lets buyers know that you’re serious when you make an offer. Getting pre-approval for a standard loan should take a couple of days.`

So one thing that makes a mortgage different from other types of loans is that it is backed up by something – in this case, your home. They call this a “collateralized loan.” Credit cards are also loans, but they aren’t backed up by anything. If you fail to make your credit card payments, the credit card companies can’t take your home away from you.

**The Salvation Army provides financial assistance to help with basic needs. If funding permits, the charity offers a rent and mortgage assistance program. To qualify for mortgage assistance, a foreclosure notice from the mortgage company is required. Applicants are screened to determine eligibility. You must have an income sufficient to resume making the payments. Prepare to provide proof of all bills, such as credit cards and utilities. If approved, a check for the month's mortgage is mailed directly to the lender.**

**Know your credit score. As soon as you decide to start looking for a home, check your credit report and credit score with any of the 3 major credit reporting agencies: Experian, TransUnion and Equifax. If you find any mistakes that need to be corrected, addressing these issues early will put you in a better position when it’s time to buy a house. (Bank of America credit card clients can get a free FICO® score in Online and Mobile Banking.)**

If you do not shop multiple lenders, you’re doing yourself a disservice. Even if you are sure this is the lender you want to use, getting quotes from other lenders can help you negotiate a better deal. Not every lender will give you the same mortgage rate, or closing costs. This is why shopping multiple lenders is very important. Getting at least 3 or 4 loan offers is recommended.

_{The NID-Housing Counseling Agency (NID-HCA) is a non-profit, HUD approved agency that assists homeowners with addressing financial situations including defaults and foreclosure, predatory lending, credit repair, referrals, foreclosure counseling, and other services. Their services are mostly free, and their goal is to help people stay in their homes. The NID Housing Counseling agency deals with a number of debt and foreclosure issues. }